Managing cash: I- Bonds vs HYSA vs Other?

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Topic Author
PA_Boglehead
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Managing cash: I- Bonds vs HYSA vs Other?

Post by PA_Boglehead »

DW and I have always held a healthy amount of cash in our emergency fund. Our EF is there to cover true emergencies related to loss of income, and also to cover big ticket expenses related to home renovations, vehicle purchases, etc.

We keep 2-3 months of expenses in our checking account, and have another year's worth of cash to cover expenses stashed in an FDIC backed high yield savings account earning all of 0.40%. We keep trickling $500 cash into the HYSA every 2-weeks so the cash is piling up. We also have a taxable brokerage account where we make significant monthly investments into equity index mutual funds.

As our balance of cash increases my eyes wander to other options. Are I-Bonds the right alternative? They have an inflation component with a floor of 0.00% so no downside risk if we were to experience negative yields, and interest earned on I-Bonds are tax deferred until the bond is redeemed.

DW and I could each make the maximum annual purchase and still have a healthy amount of cash in FDIC accounts. I would prefer to keep my investments at Vanguard rather than create new accounts Treasury Direct to be honest. Other than dealing with TD, the 12-month holding period, and the the annual maximums, what are the downsides?

The other obvious answer is just to add excess cash into equities. That is an option to me, but more in a buy the dip type scenario after a market sell-off.

Other options?
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KlingKlang
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by KlingKlang »

There are still some HYSAs out there paying around 0.80% but they will probably decrease soon.

Your plan to purchase Series I US Savings Bonds is sound. Just be aware of the one year mandatory holding period, the five year holding period to avoid the three month interest penalty, and the $10,000 per year per person purchase limit at Treasury Direct plus $5000 per year Federal Income Tax refund limit.

Equities have the highest expected long term return, but the role of emergency funds/cash is to be guaranteed to be there in the short term.
Last edited by KlingKlang on Mon Jan 11, 2021 7:22 pm, edited 1 time in total.
protagonist
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by protagonist »

I would never pass up I-bonds. Sadly there is a purchase limit.
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PA_Boglehead
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by PA_Boglehead »

From what I've read, I like I-Bonds as a vehicle to manage cash, but I cannot commit to using the Treasury Direct website. I already have to periodically remind my DW that her Roth account has a separate login at Vanguard. I smell a catastrophe in the making if my reach for yield (on our cash of all things) leads to heirs not being able to access those funds (like that poor sap in the the press today that is locked out of his $220M bitcoin digital wallet).
Angst
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by Angst »

PA_Boglehead wrote: Mon Jan 11, 2021 5:12 pm As our balance of cash increases my eyes wander to other options. Are I-Bonds the right alternative?
PA_Boglehead wrote: Tue Jan 12, 2021 9:25 pm From what I've read, I like I-Bonds as a vehicle to manage cash, but I cannot commit to using the Treasury Direct website.
Well then, that sounds like the end of this thread.
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JoMoney
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by JoMoney »

PA_Boglehead wrote: Tue Jan 12, 2021 9:25 pm From what I've read, I like I-Bonds as a vehicle to manage cash, but I cannot commit to using the Treasury Direct website. I already have to periodically remind my DW that her Roth account has a separate login at Vanguard. I smell a catastrophe in the making if my reach for yield (on our cash of all things) leads to heirs not being able to access those funds (like that poor sap in the the press today that is locked out of his $220M bitcoin digital wallet).
I'm a fan of I Bonds and use them, I don't mind the Treasury Direct website/interface, but I was perturbed at the run-around I got after they locked me out of the account for trying to add a new bank and required me to get a medallion signature stamp on a form :annoyed

...but, I hear ya! I've been opening new accounts trying to get some bonus money and a few fractions of a percent better interest.. sometimes I stop and ask myself " is the juice is worth the squeeze? " The cash I'm keeping represents a very small portion of my overall portfolio, and is primarily supposed to be for my peace of mind - yet I'm driving myself a little crazy trying to get an extra little bit that wouldn't even round up to 0.0% as a percentage of my broader portfolio :annoyed
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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PA_Boglehead
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by PA_Boglehead »

Angst wrote: Tue Jan 12, 2021 9:31 pm Well then, that sounds like the end of this thread.
If I could buy them through my brokerage firm, bank, or credit union I'd be there. I understand why they've restricted purchasing channels so as to tie purchase limits to security numbers, but It feels like an unnecessary complication to manage cash.

Maybe my taxable account is large enough that I don't need so much cash and can instead move a portion of it into VTSAX, and then buy more FXNAX bond fund in our 401K's to compensate.
tomsense76
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by tomsense76 »

JoMoney wrote: Tue Jan 12, 2021 9:42 pm
PA_Boglehead wrote: Tue Jan 12, 2021 9:25 pm From what I've read, I like I-Bonds as a vehicle to manage cash, but I cannot commit to using the Treasury Direct website. I already have to periodically remind my DW that her Roth account has a separate login at Vanguard. I smell a catastrophe in the making if my reach for yield (on our cash of all things) leads to heirs not being able to access those funds (like that poor sap in the the press today that is locked out of his $220M bitcoin digital wallet).
I'm a fan of I Bonds and use them, I don't mind the Treasury Direct website/interface, but I was perturbed at the run-around I got after they locked me out of the account for trying to add a new bank and required me to get a medallion signature stamp on a form :annoyed

...but, I hear ya! I've been opening new accounts trying to get some bonus money and a few fractions of a percent better interest.. sometimes I stop and ask myself " is the juice is worth the squeeze? " The cash I'm keeping represents a very small portion of my overall portfolio, and is primarily supposed to be for my peace of mind - yet I'm driving myself a little crazy trying to get an extra little bit that wouldn't even round up to 0.0% as a percentage of my broader portfolio :annoyed
lol :D True story I've been doing the same things and asking the same questions
tomsense76
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by tomsense76 »

FWIW this is what I've also been doing recently OP.

Buying I Bonds and actually EE Bonds too (doubling in 20 yrs has an effective yield of 3.57% which is significantly better than long treasuries or anything else at this point). Personally have found the TD website ok to use, but understand folks have had issues with it before. If you don't like TD's website, can just overpay on taxes up to $5,000/person and get paper I Bonds that way.

Also am rebalancing a bit to include some of my EF in my 401k's stable value fund using this strategy in the wiki.

Finally have also picked up some intermediate munis (VWITX). Not everyone likes these I know and there always seems to be some worry about them during downturns. That said, the data convinced me these are an ok option in fixed income (and make sense in my tax bracket). Plus I'm balancing these out with holding some bonds in tax-deferred. My main goal with munis is to have something I can sell from taxable if needed without generating too much capital gains. If it comes to it, my whole portfolio is an EF.

Planning on keeping only ~6mos expenses in HYSA going forward and investing the rest according to AA. With all of the above should easily have a couple of years worth of expenses in fixed income, which seems like more than plenty (particularly at my age). So likely will just buy TSM going forward.
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KingRiggs
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by KingRiggs »

I have 3 $25k No-Penalty CDs at Ally which constitute my emergency fund. I plan to cash one each year for the next 3 years and purchase my family max of I-bonds ($10k + $10k + $5k). At the end of 3 years, I’ll have $15 in paper I-bonds (redeemable immediately in emergency) and $60k in electronic I-bonds (redeemable quickly enough). Might add another year of $25k to make it a round number, then just let it ride as my emergency fund.
Advice = noun | Advise = verb | | Roth, not ROTH
Topic Author
PA_Boglehead
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Re: Managing cash: I- Bonds vs HYSA vs Other?

Post by PA_Boglehead »

KingRiggs wrote: Tue Jan 12, 2021 10:16 pm I have 3 $25k No-Penalty CDs at Ally which constitute my emergency fund. I plan to cash one each year for the next 3 years and purchase my family max of I-bonds ($10k + $10k + $5k). At the end of 3 years, I’ll have $15 in paper I-bonds (redeemable immediately in emergency) and $60k in electronic I-bonds (redeemable quickly enough). Might add another year of $25k to make it a round number, then just let it ride as my emergency fund.
I keep being tempted...LOL
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